FILE – This Monday, June 29, 2020 photo shows the Reddit logo on a mobile device in New York. (AP Photo/Tali Arbel)

FILE – This Monday, June 29, 2020 photo shows the Reddit logo on a mobile device in New York. (AP Photo/Tali Arbel)

Regulators eye Reddit stock rallies, but manipulation may be hard to prove: Experts

Canadian law prohibits artificially affecting the price of a publicly traded security in a co-ordinated way

Canadian regulators have said they will act if they see “abusive” or “manipulative” trading, as Reddit and other social media sites stoke stock mania.

But experts say that legal action is not straightforward: it depends on whether rallies in stocks like BlackBerry and GameStop are co-ordinated and harmful or simply cases of contagious excitement.

It’s a debate that’s playing out on the forums themselves.

On Reddit’s Bay Street Bets, one user wrote of BlackBerry’s stock, “We will support it and make it climb together,” while another decried the idea that individual investors are some sort of Reddit army.

Lawyer Chris Sunstrum says that based on what’s been reported so far, the stock mania on Reddit forums is still in a grey area for regulators.

“Does this constitute market manipulation? … I think what the regulators are trying to figure out is, have they crossed that line,” says Sunstrum of Goodmans LLP.

“Your typical retail investor just going on a chat board and giving their opinion, or helping rally the troops behind buying GameStop, is probably not going to be offside.”

The warning about manipulative trading from the Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada on Monday came after BlackBerry shares whipsawed over the previous week, mirroring trends seen in the U.S. with GameStop, AMC and other securities.

Canadian silver mining companies have also seen a boost recently, although chief executives and Reddit users alike said social media is not the only factor behind the precious metal’s rise.

So far, the social media dynamic around so-called meme stocks doesn’t fit “neatly” into any of Canadian securities laws, says Sunstrum — although it is still early days on the enforcement front.

Sunstrum says that out of all the potential accusations that could be brought against Redditors, market manipulation could become the biggest focus.

Canadian law prohibits doing something to artificially affect the price of a publicly traded security in a co-ordinated way, he says, though it can be a high bar to prove.

Another legal ramification for Reddit activity could be the charge of advising people about trading securities without the proper registration, though Sunstrum says it’s not clear that’s been the case over the past week.

Sunstrum says that other offences that could come into play include misrepresentation, where a person or company makes a statement that they know or should know is misleading or untrue in any material respect.

To fall into this category, the statement would be expected to have a significant impact on the market price of the shares, Sunstrum says, although he noted that defamation and libel could also come up as separate legal issues.

Ernest Wong, director of research at Baskin Wealth Management, says the Canadian market already has some limits in place that make it unlikely the situation in the U.S. will play out exactly in Canada. Canadian regulators and finance websites don’t list short-selling activity in the same way as the U.S., and the options market here is much smaller, Wong says.

Queen’s University associate professor Mohamed Khimji says further regulation also risks doing more harm than good.

“Is market manipulation the right expression? I don’t really have a problem with using that expression … I think the question is, really, is the activity harmful? Does it have negative effects on market confidence, the credibility of the stock markets in general?” asks Khimji, who researches business law.

“Any kind of buying and selling activity is going to manipulate the price at some level. That’s just how trading works.”

Khimji says that Canadian securities regulators tend to take the lead from U.S. regulators, and that action south of the border will give Canadian regulators something to go off. But, says Khimji, the market may adjust on its own.

“They’re really just two groups that have two different trading strategies … Both sides will learn lessons by the end of it,” says Khimji, referencing short-sellers as one group and retail investors as another. “I think this will just be priced in. Any short-seller of the future will think about this as a risk right here: what happened with GameStop, retail investors buying it up when it’s really cheap and driving up the price.”

Increasing regulation on retail investors could actually have the detrimental effect of limiting participation in the market, says Khimji.

“From a democratic perspective, I think it’s just helpful for as much (of) society to participate in the markets as possible. In any kind of regulation we need to be really sure that it’s going to help and not inhibit access,” he says, adding the stock market “shouldn’t just be for wealthy people.”

Anita Balakrishnan, The Canadian Press


Like us on Facebook and follow us on Twitter.

Want to support local journalism during the pandemic? Make a donation here.

Stocks

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

FILE – A COVID-19 vaccine being prepared. (Olivia Sullivan/Sound Publishing)
B.C. seniors 80 years and older to get COVID vaccine details over next 2 weeks: Henry

Province is expanding vaccine workforce as officials ramp up age-based rollout

Ellie and Mike Hadley of Port Alberni will open Maehem Spirits distillery in a new building on Cherry Creek Road later in 2021. (SUBMITTED PHOTO)
BUSINESS BEAT: Businesses are all about lifting spirits in the Alberni Valley

New distillery coming to Port Alberni, and more news from the business community

Wilma Walker is a longtime Alberni Valley volunteer with Community Policing. She is well known for her teaching career as well. (PHOTO COURTESY ORLANDO DELANO)
VALLEY SENIORS: Wilma Walker brings giving spirit to Port Alberni

Walker enjoys her volunteer time in the Alberni Valley

Cars depart from the Guru Nanak Sikh Society in Port Alberni during a rally on Feb. 21, 2021. (ELENA RARDON / ALBERNI VALLEY NEWS)
Port Alberni Sikh community shows support for farmers in India

Car parade departed from the Guru Nanak Sikh Society

Isha Rai, age nine, raised more than $3,000 for Coldest Night of the Year in Port Alberni. (SUBMITTED PHOTO)
Nine-year-old raises $3K for Coldest Night of the Year

Port Alberni’s Isha Rai was highest-earning participant in annual fundraiser

Dr. Bonnie Henry leaves the podium after a news conference at the legislature in Victoria on Friday, January 22, 2021. THE CANADIAN PRESS/Chad Hipolito
B.C. reports 559 new cases of COVID-19, one death

4,677 cases of the virus remain active in the province; 238 people are in hospital

Vancouver Canucks left wing Antoine Roussel (26) tries to get a shot past Edmonton Oilers goaltender Mike Smith (41) during second period NHL action in Vancouver, Tuesday, Feb. 23, 2021. THE CANADIAN PRESS/Jonathan Hayward
Canucks cough up 3-0 lead, fall 4-3 to visiting Edmonton Oilers

Vancouver falls to 8-13-2 on the NHL season

Jessica McCallum-Miller receives her signed oath of office from city chief administrative officer Heather Avison on Nov. 5, 2018 after being elected to Terrace City Council. McCallum-Miller resigned on Feb. 22, 2021, saying she felt unsupported and unheard by council. (Black Press Media File Photo)
Terrace’s 1st Indigenous councillor resigns citing ‘systemic and internalized racism,’ sexism

McCallum-Miller said in a Facebook post she felt unheard and unsupported by council

Temporary changes to allow for wholesale pricing for the hospitality industry were implemented June 2020 and set to expire March 31.	(Pixabay photo)
Pubs, restaurants to pay wholesale prices on liquor permanently in COVID-recovery

Pre-pandemic, restaurateurs and tourism operators paid full retail price on most liquor purchases

Wade Dyck with Luna, a dog who went missing near the Chasm for 17 days following a rollover on Feb. 5. (Photo submitted).
Dog missing for 17 days through cold snap reunited with owner in northern B.C.

Family ecstatic to have the Pyrenees-Shepherd cross back home.

Cannabis bought in British Columbia (Ashley Wadhwani/Black Press Media)
Is it time to start thinking about greener ways to package cannabis?

Packaging suppliers are still figuring eco-friendly and affordable packaging options that fit the mandates of Cannabis Regulations

Quesnel RCMP confirmed they are investigating a residential break-in at a home on the Barkerville Highway. (File image)
Thieves make off with $300K in Cariboo miner’s retirement gold

Tim Klemen is offering a reward for the return of his gold

Cowichan Tribes members line up at a drive-up clinic on Wednesday, Jan. 13 to receive the first doses of the COVID-19 vaccine in the region. (Kevin Rothbauer/Citizen)
Cowichan Tribes COVID-19 death count hits four

Second doses of Pfizer vaccine expected on March 8 as community count hits 230 since Dec. 31

Most Read